Fixed rate mortgage costs are 'set for imminent increase'

11 June 2009 / by Rachael Stiles

Borrowers should move quickly if they want to secure a competitive fixed rate mortgage deal, because rates are poised to increase, according to mortgage broker John Charcol.

Following another sharp rise in swap rates yesterday, spokesperson for John Charcol, Ray Boulger, believes that the increase was big enough "to be the straw that breaks the camel's back," and shove mortgage rates up.

Consequently, he predicts that several lenders will be increasing the cost of at least part of their fixed rate mortgage range in the coming days.

Recent signs of recovery in the mortgage market have been driven by an improvement in affordability – lower interest rates coupled with falling house prices.

These factors have enabled more people to get a mortgage, especially those who have built up significant equity in their home or first time buyers who have a sufficient deposit, but lenders have also been introducing higher loan to value (LTV) deals at more competitive rates.

But, Mr Boulger warns, these benefits may be negated if fixed rate mortgages become more expensive, and many more people could be frozen out of the market again.

As many as 80 per cent of John Charcol's customers are currently opting for a fixed rate mortgage, so Mr Bougler's advice for borrowers who are looking for the security of a fixed deal is to get one now or risk missing the boat for the most competitive rates.

For those who fancy their luck on a tracker mortgage, there could still be time to benefit from record low interest rates, as analysts predict that they will remain low for the remainder of the year.

But even if the base rate remains at 0.5 per cent, this does not guarantee that tracker mortgage customers will be entirely protected from rising costs, as some lenders may wish to restrict the number of applications they receive for their most competitive deals by increasing the interest rates, while they continue to restrict their lending.

Swap rates – the rate at which financial institutions lend between each other – rose by more than 0.2 per cent for two and three year swaps, and are up 0.14 per cent for five years. In just over three weeks following the publication of the Bank of England's quarterly inflation report, three and five year swap rates have surged 0.62 per cent.

The fact that swap rates have increased at a time when the Government is trying to drive down the cost of borrowing is presenting it with "a major problem," Mr Boulger continued.

"Having pushed Bank Rate down to almost zero the strategy is to boost the economy by reducing the cost of longer term borrowing. This sharp upward movement in market rates demonstrates that the Government is impotent in this area and has lost control of interest rates except at the very short term end."